Lord Flight is Chairman of Flight & Partners Recovery Fund, and is a former Shadow Chief Secretary to the Treasury.
The continuing flow of US fines on British banks for regulatory breaches prompted me to enquire as to the total fines levied on British banks by US Authorities and vice versa. The House of Lords Library kindly investigated the figures for me, including all fines issued by the various Regulatory or Justice authorities in the UK against banking institutions headquartered in the US and again vice versa.
The cumulative totals cover the period 2012 – 2017. The cumulative total imposed by UK Regulators against US-headquartered banks was £737,246,200. The cumulative total imposed by US Regulators against UK-headquartered banks was $9,541,000,000 – approximately ten times the fines imposed by UK Regulators.
I view this as outrageous. A major cause of the 2007-08 financial crisis was reckless mortgage lending, encouraged by the legal requirements of the US Government. Much of the mortgage lending was packaged into anonymous collateralized debt obligations (CDOs) and sold on to the banking system throughout Europe. At the time, the Bank of England estimated that UK banks would need to write off £123 billion against CDOs, with continental European banks needing write off £628 billion.
Actual figures have been larger than these estimates. Securitised packages of CDO mortgages were structured to include good and bad loans, and were cut and diced so that some packages included different parts of the mortgage obligations. There was no transparency – the instruments were mostly owned by off balance sheet financing vehicles. The banks were foolish to buy them, because they had AAA credit ratings.
The origin of this toxic US mortgage lending was Bill Clinton’s extension of the Community Redevelopment Act, designed to encourage minority home ownership. This obliged Fanny Mae and Freddie Mac to provide large and easy mortgage lending terms to underprivileged Americans, and led to the creation of the market in high risk, sub-prime securitised mortgage loans, on a massive scale. Both the US Government and Central Banks encouraged the securitisation of these mortgage loans, which was seen as both a way of spreading banking risk and making such mortgage loan financing packages more liquid.
After two years of falling US house prices, the more prudent US and UK banks began to realise in the summer of 2007 that many of the CDO packages they held contained a significant element of bad lending, which was unlikely to be repaid. The banks had bought them on the basis of their mistaken AAA credit agency ratings, and frequently did not fully understand the risks which they contained. The inter-bank market in CDOs then went illiquid, in turn putting pressure on the overall liquidity of the banking system in both the US and the UK.
Given that the US was largely responsible for the 2007-08 financial crisis, it is surely wholly inappropriate that it has levied ten times the volume of fines imposed by the UK authorities. The US Regulators have, in effect, helped themselves to £7 billion of British banks’ capital and British pension funds’ investments in British banks. In addition, highly doubtful CDOs packaged and sold by US banks to European banks contained over £1,000 billion of losses.
It surprises me that the UK Government and UK Regulators appear to have accepted what has happened, where they might at least have considered imposing fines at a similar level to the US and considered pursuing US banks or, potentially, US Government Agencies, for the massive losses to the banking system resulting from highly suspect US CDOs sold from the US to EU banks.
Let’s all work together to keep Corbyn and McDonnell out of government
For any sensible citizen – a category that includes a lot of sensible Labour MPs – the crucial political objective must be to keep Jeremy Corbyn and John McDonnell out of Government. They would wreck our economy and as has been witnessed already, their supporters behave in an undemocratic fashion.
For the Conservative Party, and in particular the Cabinet and MPs, the task is blindingly obvious – to get on with negotiating a sensible Brexit and to shut up feeding hungry journalists divisive stories. Theresa May both deserves sympathy and respect for what she has been through and has the support of Conservative MPs to get on with the job of being Prime Minister. Foolish tittle-tattle can only benefit Messrs Corbyn and McDonnell and their gang.